Investor Preferences Research Articles

A Decomposition of Conditional Risk Premia and Implications for Representative Agent Models

We develop a methodology to decompose the conditional market risk premium and risk premia on higher-order moments of excess market returns into risk premia related to contingent claims on down, up, and moderate market returns. The decomposition exploits information about the risk-neutral market return distribution embedded in option prices, but does not depend on assumptions about the functional form of investor preferences or about the market return distribution. The total market risk premium is highly time-varying, as are the contributions from downside, upside, and central risk. Time-series variation in risk premia associated with each region is primarily driven by variation in risk prices associated with the probability of entering each region at short horizons, but it is primarily driven by variation in risk quantities at longer horizons. Analogous decompositions implied by prominent representative agent models generally fail to match the dynamic risk premium behavior implied by the data. Our results provide a set of new empirical facts regarding the drivers of conditional risk premia and identify new challenges for representative agent models. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01663 .

Comparing the performance of Qatari banks: Islamic versus conventional, amidst major shocks

This paper analyzes the performance of Islamic banks (IBs) in Qatar compared to their conventional counterparts (CBs), considering the effects of four major events: The subprime crisis, economic blockade, Covid pandemic, and the Russian–Ukrainian conflict. We collected quarterly data from seven listed Qatari banks (4 CBs and 3 IBs). We examine and compare their performance and financial ratios evolution from January 2008 to December 2022 in terms of profitability, asset growth, solvency, liquidity risk, management investment preference, and operating efficiency. We use the t-test to evaluate the effects of the four major shocks on IBs and CBs performance.

How does institutional investor preference influence corporate green innovation in China?

In this study, we examine the green innovation effect of investor preference on Chinese listed companies from 2008 to 2020. We observe that investors with environmental protection preferences can significantly increase enterprise green innovation. The baseline conclusions remain robust after we conduct multiple sensitivity tests, such as establishing a shift-share instrumental variable (Bartik IV), using the Heckman’s two-step method, changing the regression methods, substituting the core variables, adopting the DID method, and considering investors’ ownership. Our analysis shows that the green innovation effect of environmental investors is highly pronounced in companies with a high level of indebtedness and low managerial ability. We verify that environmental investors can improve the green innovation level of enterprises through two potential mechanisms, namely, easing corporate financing constraints and incentivising managers. In addition, political and public attention can strengthen the positive relationship between environmental investors and green innovation.

Blockchain adoption strategy of two-sided shipping platforms connecting forwarder and liner company

Blockchain technology has already been explored and used in many industries, while the shutdown of shipping blockchain platform TradeLens poses a substantial challenge to the blockchain adoption in the shipping supply chain. Motivated by this practical issue, we develop a Hotelling model to study two competitive shipping platforms’ pricing strategies and blockchain technology investment preferences in three scenarios including both shipping platforms invest nothing, only one shipping platform invests, as well as both shipping platforms invest. The liner companies and forwarders in the two-sided markets may join only one shipping platform (i.e., singlehoming) or join two shipping platforms simultaneously (i.e., multihoming). Our results suggest that whether the blockchain technology is introduced or not, the shipping platforms in each scenario provide the pricing strategies via subsidizing and charging the entry fees for the liner companies and forwarders when singlehoming occurs, whereas the only pricing strategy is to demand the entry fees when multihoming occurs. Moreover, we find that the shipping platforms’ investment preferences over blockchain technology would not be affected by the liner companies’ and forwarders’ singlehoming or multihoming behavior. The shipping platform without blockchain technology investment can achieve profit improvement by free riding via the other shipping platform’s blockchain investment decision given certain investment cost, while the shipping platform with blockchain technology investment instead suffers a loss of profitability due to its investment decision. In particular, compared to singlehoming, the shipping platforms may obtain higher equilibrium profits when multihoming occurs among three scenarios.

Using investor utility to determine portfolio choice with REITs

This article examines the decision of individual investors to allocate a portion of their existing investment portfolios to REITs. It first derives the risk preferences of investors represented by their benchmark portfolios of stocks and bonds. Such risk preferences are then used for portfolio decisions regarding REITs. The analysis shows that investors with lower risk aversion tend to have a more substantial stock component in their benchmark portfolio and will obtain higher risk-return benefits from adding REITs. In addition to the theoretical analysis, the article provides a practical solution to evaluate the benefit of investing in REITs.

Analysis of the Game Behavior of Real Estate Mortgage Securities Issuers Based on Reciprocal Preferences

In recent years, the Chinese government has gradually begun to pay attention to the development of real estate investment trusts (REITs) and hopes to use REITs to increase the securitization of assets in the real estate market, making it possible to accelerate the circulation of funds in the real estate market. In order to enable issuers to price REITs effectively to form a mutually beneficial transaction model with investors, to increase the willingness and success rate of both parties and to ultimately create a harmonious and efficient REITs market, it is important to study the pricing decisions of issuers when issuing REITs. This study analyzes and investigates the issue of pricing decisions of REITs based on reciprocal preferences and evolutionary game theory. It is found that when the proportion of REITs issuers choosing to construct a reciprocal initial pricing decision is greater than the equilibrium probability of REITs issuers choosing a reciprocal pricing strategy, and when the initial proportion of investors choosing a reciprocal investment decision is greater than the equilibrium probability of investors choosing a reciprocal investment strategy, the overall REITs transaction market tends to be a reciprocal and harmonious transaction market at this time, the overall happiness of the REITs trading market is the highest, and the success rate of trading increases and the capital circulation of the real estate market is accelerated. Therefore, it is recommended that issuers choose reciprocal competitive decisions when pricing REITs in order to increase the success rate of their own REIT holdings; and it is recommended that the government, when regulating the pricing of REITs, pays attention to the psychological factors of reciprocal preferences of issuers and investors and that the government penalizes REIT issuers and investors when they choose self-serving decisions and rewards them when they choose reciprocal decisions.

Risk and Investment Value Analysis in the U.S. Airline Sector of the Stock Market

Amid the evolving global economic landscape, the U.S. airline industry has undergone significant transformations, thus raising the need for comprehensive analyses of its investment value and inherent risks. Financial health, risk management strategies, and investment potential of key players in the U.S. airline sector were assessed, namely, Southwest Airlines, American Airlines, and Singapore Airlines. The research methodology involves a thorough evaluation of the financial ratios of these airlines, their strategic initiatives such as hedging, as well as their environmental, social, and governance (ESG) risk ratings. Key metrics such as Return on Invested Capital (ROIC), the Piotroski F-Score, Altman Z-Score, and debt ratios among others form the foundation of the analysis, providing insights into their operational efficiency, financial strength, and risk profiles. The study concludes that each airline exhibits a distinct financial profile with varying levels of investment potential. The choice between investing in these airlines hinges on individual investor preferences, risk tolerance, and investment horizons. The results reveal that Southwest Airlines and Singapore Airlines present lower risk profiles, potentially appealing to conservative investors, while American Airlines could appeal to more aggressive investors due to its high potential returns, albeit at a higher risk. Meanwhile, Singapore Airlines offers a balanced profile attractive to growth-focused investors. The importance of aligning investment decisions with personal investment objectives and risk tolerance was underscored, thereby providing valuable insights for potential investors in the U.S. airline sector.

Family business origin and investment preference: An empirical study of imprinting theory

Family businesses in China differ acutely with respect to their historical origins. The initial institutional differences based on their origins affect investment behavior, which then impacts on the real economy. This paper investigates how the origins of family businesses affect their investment preferences. Using data on Chinese family firms for the period 2009–2021, we find that family businesses restructured by state-owned enterprises (SOEs) make more financial investments than those established through entrepreneurial activities. The period during which the business is under the control of the founding family and intergenerational succession moderates the differences in investment preferences between restructured and entrepreneurial family businesses, while the time of being as an SOE can strengthen the differences. Mechanism tests demonstrate that restructured family firms (RFFs) participate in less risky activities than entrepreneurial family firms (EFFs), suggesting that preference imprinting contributes to divergent investments. Such a divergence is unlikely to be driven by differences in entrepreneurship, agency costs, or resource endowments. Following robustness tests and after overcoming endogeneity problems, our results remain conclusive. Overall, this study demonstrates that a business’s risk propensity during its founding phase has a long-term impact on future preferences.

Reaching for Yield and the Cross Section of Bond Returns

Reaching for yield, which we define as an investor preference for higher-yield bonds at a given rating or for higher-rated bonds at given yields, is associated with inflated valuation and thus negatively predicts risk-adjusted returns. Controlling for ratings, alphas are lower for higher-yield bonds, whereas, controlling for yields, alphas are lower for safer-looking, higher-rated bonds. Future bond returns are particularly low when current interest rates are low and demand from yield-reaching investors increases. These bonds experience more frequent downgrades and defaults, suggesting that they are riskier despite their high valuation. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The e-companion and data are available at https://doi.org/10.1287/mnsc.2023.4920 .

Proportional warm-glow theory and asset pricing

Dreyer, Sharma and Smith (2023) conjecture that investors may feel good about themselves from making socially responsible investments; they may get a “warm glow” from going green. They estimate a model of “warm glow” investment where investors derive utility from the total amount invested in green assets. In this paper we quasi-replicate their paper to estimate an alternative form of warm-glow preferences where people get utility from the share of their wealth invested in green assets. We show that the green preference of investors has become significantly larger since the financial crisis of 2007.

Investors' preferences for sustainable investments: Evidence from the U.S. using an experimental approach

In addition to the classical risk-return approach in investment, there is an increasing awareness of integrating sustainable development goals (SDGs) as a new dimension to value creation. However, limited research has been conducted, offering mixed results. Therefore, we examined investor preferences for investment funds that contribute to achieving the SDGs of clean water and sanitation. We used a choice experiment to analyze the funds' value for U.S. investors, adopting a survey approach based on 581 actual observations from October to December 2022. The findings reveal that investors show stronger preferences for portfolios that contribute to the development goals; they are willing to forgo returns when investments contain SDGs or are provided by sustainable banks. These findings have implications for investors and fund managers.

Fisher's Separation Theorem and its Limitations

When businesses make investment decisions, they often evaluate the Net Present Value (NPV) of investment projects. For investors, a project is deemed worthwhile if its NPV is greater than zero. This phenomenon can be attributed to the Fisher Separation Theorem, which asserts that in perfectly efficient capital markets without transaction costs, a single interest rate prevails. In this context, investors' production choices adhere strictly to objective market regulations aimed at maximizing attainable wealth, entirely detached from individual subjective preferences. This, in turn, enables both borrowers and lenders to base their consumption and investment decisions on the prevailing market interest rate, thereby encouraging a clear distinction between investment and financing choices. Therefore, a company's investment decisions can be discussed separately from its financing decisions. So, the enterprise's investment decision and financing decision can be discussed separately. When enterprises invest, enterprises do not have to consider the subjective consumption preferences of different investors, because investors' consumption preferences can be satisfied accordingly through perfect capital market operation. Because of Fisher's Separation Theorem, which requires the market to be transaction cost-free, it also has some limitations.

Public preferences for social investment versus compensation policies in Social Europe

The recent enactment of the European Pillar of Social Rights (EPSR) has significantly strengthened the social dimension of the European Union (EU), including the social investment (SI) elements of that social dimension. What is not known, however, to what extent the priorization of SI is supported by the broader public. To address this research gap, we investigate public opinion on 15 different policy areas from the EPSR using Eurobarometer data from 2020 across all EU countries, asking whether the public rather prefers these policies to be delivered at EU or national level. A principal finding is that the public indeed supports more SI than CP policies with respect to EU-level social policy, and more CP than SI policies with respect to national-level social policy. We also investigate whether socioeconomic status (SES) and welfare state effort can explain this phenomenon. We find that higher socio-economic status and more generous welfare states are associated with more support for SI policies on both EU and national levels and vice versa. The findings emphasize the importance of what policies are provided versus who provides them but also pose a puzzle for trade-offs in multilevel governance settings. Hence, the article has important implications for future research on public opinion and Social Europe.

The role of ESG performance in firms' resilience during the COVID-19 pandemic: Evidence from Nordic firms

Firms' corporate social responsibility and environmental sustainability issues have been documented to provide a competitive advantage that enhances financial performance, especially in tightened economic situations. Similarly, studies on countries' economic performance during the COVID-19 pandemic show a significant effect of movement restriction (lockdown) as a spread-containment strategy. This paper analyses the exogenous effect of lockdown on firm performance during the COVID-19 pandemic and the role of firms' sustainability in resilience to the pandemic. This study uses a difference-in-differences analysis on data of publicly listed Nordic firms, showing a positive and significant difference in revenue and profitability for firms listed in lockdown countries compared with those in the country without a lockdown. Further analysis shows that sustainability provides resilience for firms during the COVID-19 pandemic, as firms' environmental and social performances are positively related to revenue, profitability, and valuation. This finding supports the conclusion that customer and investor preferences enhance sustainable firms' performance.

Changes in the Relation Between ESG and Expected Returns According to ESG Awareness Levels

The COVID-19 pandemic has triggered an increased awareness and interest in ESG (Environmental, Social, Governance) among investors in the Korean market. Consequently, this study examines the changes in investors’ tastes and preferences regarding ESG before and after COVID-19 and analyzes how these changes affect the relationship between ESG and expected returns. The analysis revealed that, before COVID-19 the excess returns of portfolios constructed by buying stocks with high ESG scores and selling stocks with low ESG scores were not statistically significant. However, after COVID-19 the excess returns of these portfolios were significantly positive. This result suggests that prior to the pandemic, investors did not perceive ESG as a risk and showed no preference for ESG investments, leading to insignificant excess returns close to zero. In contrast, after the COVID-19 pandemic, increased interest in ESG resulted in a shift in investor preferences, leading to positive excess returns in ESG investments. The results remain consistent even after controlling for firm characteristics. Furthermore, when we examine the impact of each ESG component on expected returns separately, we find that heightened interest in environmental and social factors has a significant positive effect on expected returns.

Mechanisms to promote household investment in wind energy: A national experimental survey

Citizen investment into wind energy is conducive to public acceptance and can contribute to closing the renewable energy investment gap, while promoting corporate social responsibility. This study addresses this topic and conducts a novel choice experiment to determine the investment preferences of a representative sample of 1,009 Irish households. First, the paper investigates the attributes determining willingness to invest into wind farms. Second, it considers to what extent public attitudes and proximity to wind farms affect investment. Third, it assesses the suitability of five specific investment mechanisms. Through these activities the findings enhance current understanding of the opportunities and challenges concerning the design of citizen investments within a centralised system which is predominantly reliant on incumbent wind energy developers. The findings show that the risk of loss and the expected annual return on investment are the main attributes determining investment decisions, but secondary criteria, such as the project location and ownership characteristics, also affect willingness to invest. Respondents living within 10 km of a wind farm or expressing support for wind energy are significantly more likely to consider investing. Recommendations include interventions to encourage joint ventures between community organisations and specialised developers as a mechanism to promote investment in wind farms.

Investment preference for either technical or operational energy efficiency measures to achieve sustainable maritime shipping

AbstractThe reduction in energy consumption in shipping is a crucial issue to achieve a more sustainable sector. Nevertheless, investments in energy efficiency are inhibited by barriers. Consequently, under a Principal-Agent approach, this study aims to analyze the factors affecting the investment preference for either technical or operational measures. To date, the research problem has barely been addressed from a similar approach. This work further integrates agency theory with the identification of barriers and drivers, as well as the cost–benefit ratio from both an environmental and a financial perspective. This makes it possible to consider shipping management from a more comprehensive perspective. The study sample is current and representative (658 individual bulk carriers). The research was carried out utilizing two binominal logistic models that provide similar results when testing the proposed hypotheses. The outcomes show that regulatory factors, such as the distance of a vessel’s technical emissions from EEDI requirements (standardized coefficients: −2.8352 and −2.5069), and Principal-Agent problems, such as split incentives (standardized coefficients: −1.0059 and −0.9828), have the greatest influence on investment preferences. As a consequence of Principal-Agent problems, vessels operating under Time Charter contracts are less likely to invest in technical measures than in operational ones. Verified information and activity promote technical measures. Maritime regulation promotes technical measures in younger vessels, especially those meeting only the minimum requirements. Better knowledge can help achieve a more environmentally responsible shipping sector. The role of shipowners and charterers should be highlighted, and transparency should be promoted to enable well-informed decisions to be made.

A Study on Factors Influencing the Perception and Preference of Investor’s Behaviour towards Stock Broking Services

A Study on Factors Influencing the Perception and Preference of Investor’s Behaviour towards Stock Broking Services

ESG investment preference and fund vulnerability

It has been extensively demonstrated that ESG investment has an impact on funds, but whether and how ESG investment affects fund vulnerability is still an important topic to be explored. Herein, the micro data of fund holdings of stocks and bonds and firm ESG performance are used to measure the ESG performance and vulnerability of funds and investigate the relation between the ESG preference of fund investment and fund vulnerability. The findings demonstrate that the better ESG performance of funds significantly reduces their vulnerability. Besides, we verify how the ESG performance of funds affects their vulnerability through two channels, i.e., the investor attention channel and the fundamental channel, and find that the better ESG performance of funds increases portfolio liquidity and weakens the performance-flow relationship, thus reducing the impact of the flows of related funds11Related funds indicate funds that hold assets in common with the fund. on them and reducing their vulnerability. In addition, we also find that lower network centrality, stronger liquidity timing ability, and the proposal of the “dual carbon” goals strengthen the negative impact of the ESG performance of funds on their vulnerability.

Does government investment push up manufacturing labor costs? Evidence from China

China’s labor costs have risen rapidly compared with other emerging market countries in recent years. Government investment is an essential factor pushing labor costs, a unique and exciting phenomenon in China. This paper explains why labor costs in China’s industrial manufacturing industry have rapidly increased from the local government investment perspective. First, the government’s preference for investment in infrastructure construction creates labor demand and drives up labor costs. Second, the improvement of infrastructure lowers the transaction costs of the enterprise sector, thus expanding the scale of production and triggering a rise in labor costs. The empirical results show that for every 1% increase in government investment, the unit labor cost increases by 0.0013 units, and the nominal labor cost increases by 1.443 units. A series of robustness tests support the results. China should rationally control the scale of government investment so that labor costs are in a moderate growth range and then promote the sustainable development of enterprises.